I am in desperate need of advice! My husband and I bought our house in 2004 and have refinanced twice since then, due to medical bills, job loss, etc. My husband got taken for a real ride with this last refi he signed. We are currently in a negative am adding $2000 a month to our loan... we need out NOW. We now owe $465,000 on a house that we bought for $340,000. It was worth about $500,000 nine months ago. :)

We are current on our payments. My husband's is the only name on the mortgages (there is a 1st and a 2nd). He has perfect credit as of now. We are all set to continue with a "short sale" of the house, priced at $375,000 (10% below market value is what the banks want with a short sale?). At the end of the sale, with realtors' commissions and fees added in, we will owe a difference of approx. $112,000. The lenders then agree to "forgive" this debt. They, in turn, report this loss to the IRS, who turns around and 1099's us for that amount. Our CPA says that we will claim insolvency and won't pay a penny of it so not to worry about it.

What I am having second thoughts about is this: I have contacted our lenders and asked just what exactly they report to the credit bureaus regarding the whole "short sale" transaction. Their reply was this: "Settled for less than due." They do not negotiate. Even if we threaten to stop making payments. So even if we stay current on our mortgage payments and complete the short sale successfully, my husband's credit will be screwed in the end, right? My credit will remain intact no matter what. Well, my thought is, why would we continue to make our measly $1800 mortgage payments each month (it could be a while till it sells--we're in So. Cal) if we're going to owe them over $100,000 when this is over and our credit is shot anyway? In fact, why wouldn't we just foreclose, stop making payments, sit back and live rent-free for the 9 months or so it would take for them to evict us? Every source I have spoken with in California says we will not be liable for the difference between what the house sells for at auction and what we owed. Is there really that big of a difference between the effects on credit between foreclosure and short sale? I feel odd morally about this, but then again, morally leaving a debt of $112,000 isn't right either. We're just in an awful situation and can't get out. Does anyone have any thoughts?

Thanks a lot, Kate

Take the deal. While it will have a deleterious affect on your husband's credit, it will not be a default (which is what a foreclosure is). If the banks are willing to eat the difference, let them.

Thank you, Scott. Should we continue to make our mortgage payments while the house is on the market?

Yes, of course. You don't want anything to risk defaulting. If you do, they might pull the short sale deal off the table.

Hi Kate,

It has been a month since your post so I hope you either are at the same position or have not taken bad choices. To answer your questions in summary, I can tell you it is much worst to have a foreclosure on your credit history than having it reported on your credit profile as "charged off" instead of settled in full. You can however still do a short sale without any ramnifications on your part. The investor looking to do the short sale has plenty to gain obviously. But he/she also needs to have your best interest at heart as well. As part of the short sale agreement, and his offer to the bank, he/she needs to put in there a clause that says that you are not held responsible for the portion of unsatisfied debt AND that the credit report will also reflect settlement in full. A bank will probably accept this and if not, then it is your choice to accept to proceed with the short sale (new contract with investor) to accept the potential ramnifications. BUT this, again, can be avoided if the investor places this is his offer to the bank. Keep in mind that aside from a 1099, the bank may also sue you for the unsettled debt and a default judgement be placed against you. This means that if you sell a boat and realize a profit in it, you are legally supposed to give up this profit to the bank to start satisfying what you owe the bank.

So it is assumed that you are considering entering into a short sale agreement because your property has no Equity?? Remember, if your property has equity, there should be no reason for you to be entering into a short sale. You can do a "Subject To" which gets your debt paid in full, and you can get benefits from the investor looking to gain from your equity.

Please also note, banks are not motivated to accept a short sale of you have not received an NOD. But it seems that given the current foreclosure rates banks may be willing to do so with a convincing hardship letter and offer from your investor. It is rare though, but it has happened before.

If you have more questions, please feel free to email me at [email protected].

Good luck!

Marlon